McLEAN AND CO.

 
 
 
EMAIL NEWSLETTER  DECEMBER 2003
 
 

Welcome again to the McLean and Co. Newsletter in which we discuss current taxation and business matters. We trust you find it informative.  Any feedback would be welcomed.

McLean and Co. is a home based chartered accountancy practice based in Clive, Hawkes Bay.    Readers are invited to peruse the practice website www.mcleanandco.co.nz,  which lists services provided, gives contact details and indicates how to become a client, contains an extensive base of articles on business and taxation matters,  and has links to other websites that may assist your business.    Being a small firm itself,   McLean and Co. strives to provide a personal and professional service largely to a self employed person and small business client base.  Enquiries are welcomed.

 

SEASONS  GREETINGS

This is the last issue of the McLean and Co Email Newsletter for 2003 so we'd like to take this opportunity to wish everyone a Merry Christmas and a Happy New Year.   We hope you and your families have a safe and enjoyable holiday break  and we looking forward to dealing with you again next year.

 

INDEX

  1. Free Postage for Tax Payments

  2. Cessation of Taxable Activity for GST

  3. Paying School Children to Work in your Business

  4. Keep the Cash flowing

  5. Prohibition of Delinquent Company Directors and Managers

 

RELEVANT BUSINESS AND TAXATION ARTICLES

The McLean and Co. website contains an extensive number of articles prepared by McLean and Co. relating to taxation and business matters.    Here are a selection that will be of interest:

To Lease or Own                                         www.mcleanandco.co.nz/Page21.htm

Financial Management Planning                  www.mcleanandco.co.nz/Page86.htm

Reasons for Business Failures                    www.mcleanandco.co.nz/Page34.htm

Is your Activity a Business or Hobby?        www.mcleanandco.co.nz/Page115.htm

43 Ideas to Promote your Business            www.mcleanandco.co.nz/Page97.htm

 

NEW CLIENTS

We are happy to accept new clients.  Please contact ourselves at the contact points highlighted above if we can assist you in your accounting and taxation requirements. Our website lists information required for this in the following link:

www.mcleanandco.co.nz/Documentationrequired.htm

 

 

FREE POSTAGE FOR TAX PAYMENTS

The Government has announced that businesses will be able to free post their payments of GST , PAYE and Fringe Benefit Tax from the beginning of next year.

The Government stated that the move is part of the Government's ongoing projecrt to reduce compliance costs and is a way of recognising the work business does on behalf of the tax system.  


CESSATION OF TAXABLE ACTIVITY FOR GST

Occasionally taxpayers cease a taxable activity but continue to maintain their GST Registration and file Nil GST Returns.  IRD must be notified when taxable activities cease.  The legislation requires notification within 21 days of cessation.    The notification is made in advance of deregistration.

Once your business is finalised you should complete a final GST Return and file an IR315 Business Cessation Form.   IRD will confirm the deregistration.  If you receive any payment for GST supplies subsequent to deregistration or wish to make any adjustments, you can advise IRD in writing.

 

PAYING SCHOOL CHILDREN TO WORK IN YOUR BUSINESS

School children are liable to income tax in the same way as other taxpayers.   However, school children whose total earnings from all employment does not exceed $20 per week or $1040 per year are not required to provide their IRD number to their employer and it is not necessary to deduct PAYE.   PAYE or Withholding Tax  must be deducted if the school child is earning more than the threshold.

Where a school child does not provide an IRD number, and total earnings exceed the threshold, you must deduct PAYE at the "Non Declaration" rate of 45c in the dollar.

If you pay your own children to work in your business, the pay rate should reflect the effort put in and the market rate for similar casual or part-time work.

There is no threshold for university, polytechnic, and tertairy students.  PAYE or Withholding Tax should be deducted from their wages or contract payments.  Tertiary students working part-time should be encouraged to apply for a Special Tax Certificate.  Otherwise they will pay tax at the normal rates and have to lodge a Tax Return to get a refund.   Applications for a Special Tax Code are made on Form IR23 BS. 

 

 

KEEP THE CASH FLOWING

 

A thriving business is so often a vulnerable business.   The increased business can mean that attention shifts away from  your business’s lifeblood- cashflow.

 

Cash flow, or working capital as it is called, is the money available to pay for the day-to-day operation of your business.   Without it your business, no wonder how profitable or successful, can’t survive.    A failure to manage working capital is a major cause of business failure, so careful management of cash flow is essential.

 

Adoption of these strategies are important to take control of your cash flow and ensure that your business thrives and prospers:

·          Never run out of Cash- running out of cash will  result in business failure.

·         Cash is King-  it’s important to recognize that cash is what keeps your business alive.   Manage it with care and the attention it deserves, its very unforgiving if you don’t.

·         Know the Cash Balance right now- even the most intelligent and experienced person will fail if they are making business decisions using inaccurate or incomplete cash balances.

·        Do Today’s Work Today-   the key to keeping an accurate cash balance in your accounting system is to do today’s work today.   When you do this, you will have the numbers you need- when you need them.

·         Either you do the Work or You have someone else do it-   The work must be done. You can’t ignore it.   You do the work or have someone else do it.

·         Don’t Manage the Bank Balance-  the Bank Balance and the Cash Balance are two different animals. You have to reconcile your bank balance and allow for unpresented items to derive your correct position.

·         Know what you expect the Cash Balance to be Six Months from now-  this one question will give you a foresight into your future business position.

·        Cash Flow Problems don’t just happen-   an owner must be able to see a future cash flow problem in time to do something about, thus the need for future forecasting.

·         You absolutely, positively must have Cash Flow Projections-   Cash Flow Projections are the key to making wise and profitable business decisions.

·          Eliminate your Cash Flow Worries so that you are free to do what you do best   (taking care of Customers and make more Money).

 

 

IDEAS TO IMPROVE CASH FLOW- CREDITORS

Create a “Terms of Business” document for all customers and make as few exceptions as possible.
Create a “Cash In First Policy” for your business and your bookkeeper. Before anything else, focus on collections, then pay suppliers.  (Get someone else to do it if you don’t like to chase debts as well as sales).
Review your client book and classify customers (e.g. A, B, C class of customer).   Increase prices to slow payers.
Invoice immediately work done and goods sent.
Send statements by mail.  Hand write on each when payment due
Put in place a  step by step Debt Collection process.   For example (a) polite email asking for payment in the next 24 hours   (b) Follow up call    (c) Faxed Letter of demand   (d) Faxed Letter action imminent   (e)   Court Summons- no one likes a black mark on his or her credit record.
If  customer is struggling to pay, don’t demand it all, ask for a smaller amount regularly.   Be flexible, getting them started on the payment cycle is better than no payment at all
Charge extra for giving terms.
Discount for early payment but build an extra margin into prices.
Ask for deposit with order
Accept credit cards.
Get twice monthly reports on collections.  Manage this religiously
Consider factoring invoices or invoice discounting but seek independent advice first.   This can be tricky as you put yourself in the hands of factoring companies who may not have your best interests at heart.   It may also not be necessary if you put the other measures suggested here in place.

   

IDEAS TO IMPROVE CASH FLOW- SUPPLIERS

·          Ask alternate suppliers to tender.

·      Negotiate longer terms from suppliers.

·      Introduce Purchase Orders to reduce discretionary staff spending.

·      Don’t pay early unless big incentives are given

·      Use a 30 day Credit Card.  This can add 51 days to terms.   Warning- dangerous to your financial  health if misused!!

 

 

IDEAS TO IMPROVE CASH FLOW- STOCK

·          Identify surplus stock for sale and return

·      Set up a just in time Stock Replacement System

·      Create a Stock Holding Register.

·      Set minimum and maximum levels for each stock line.

 

 

IDEAS TO IMPROVE CASH FLOW- TO KEEP CASH HERE

·          Identify and sell surplus assets.

·      Consider sale and lease back of productive assets.

·      Extend payment to shareholders.

·      Offer equity in business for cash.

·       Assess your bank fees. Renegotiate if necessary.

·       Combine multiple accounts into one.

·       Lease assets and equipment and retain useful cash.

·        Delay capital equipment purchases.

·        Get electronic banking set up so you can see your cash position when you need too, not when the bank sends out statements.

·       Put surplus cash into high interest Term Deposits or Cash Management Accounts.-  Cash Management Accounts can be re-drawn if the business needs it quickly.

·       Create a separate account for staff entitlements such as super, holiday pay, long service leave.   Treat it as a savings account.

·        Buy shares in other quality companies with spare cash and keep adding to it over time.  It’s easily liquidated when you need it.

 

 

PROHIBITION OF DELINQUENT COMPANY DIRECTORS AND MANAGERS

The prohibition power is designed to protect the public from directors or managers who have a track record of commercial failure.  It affirms the accountability of directors and managers to creditors and shareholders as demanded by the Companies Act 1993.

Section 385 of the Companies Act 1993 gives the Registrar of Companies the power to prohibit a person from being a director or promoter of a company, or being concerned in, or taking part, whether directly or indirectly, in the management of a company for a period not exceeding five years.

If a person is convicted of breaching the prohibition order, they are liable to imprisonment for a term not exceeding five years or to a fine not exceeding $200,000.  The online Companies Office website www.companies.govt.nz holds a database of persons prohibited under s385.


Section 385 of the Companies Act 1993 sets out the framework for the prohibition process:

  1. The person must have been a director of, or concerned in, or a person who took part in, the management of one or more companies.
  2. One or more of those companies must have  failed within the previous five years.      Failed companies include those which have been liquidated, placed into receivership or have ceased trading for being unable to pay debts as and when they fell due.
  3. If the person has been a director / manager of two or more failed companies, that person must satisfy the Registrar that either mismanagement was not even a partial cause of the failures; or that it would not be   just or equitable¡¨ to exercise the power.
  4. If there has been only one failure, the onus of proving mismanagement rests with the Registrar.
  5. The Registrar must then notify the person of his intention to consider exercising the power, and consider any submissions that person wishes to make to the Registrar.
  6. If prohibition is warranted, a prohibition period is then set, and the person is formally notified of this fact.

 

The criteria which are relevant to taking prohibition action include:

the number of failed companies;
the degree and incidences of mismanagement;
the existence or absence of any external factors;
the degree of managerial control exercised by the person concerned;
the amount of the deficiency to creditors;
the number of creditors; and
the strength of evidence for prohibition.


There is an avenue for lodging complaints about corporate delinquency.  The disqualification process is complaint driven, although reports in the public domain may also give rise to an investigation.


Prohibition action usually stems from information supplied by the liquidator of a company.  Referrals may, however, be forwarded to the Registrar from any source.  Documents relating to the company in question or formal reports on the role played by persons in the management of such companies may also be submitted.


Action by the Registrar under section 385 is discretionary, and the Registrar will consider whether there is a possible risk to the public in allowing the person to act as a director, manager or promoter of a company.  Before any action is taken, a referral must be accompanied by some evidence which: identifies that the person was involved as a director of or manager of one or more companies that have failed within the last five years; and, establishes some grounds for the belief that mismanagement was at least partly responsible for the failure of one or more of those companies.

 

If we can assist further, please email McLean and Co as follows:

 CONTACT McLEAN AND CO. BY EMAIL BY CLICKING ON THIS LINK

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